Colonial nears deal but Spanish outlook darkens

By

Agencies

PublishedWednesday, March 19, 2008

Spanish property company Colonial moved a step closer to a complicated takeover deal on Tuesday but the clouds gathering over the real estate sector grew darker as a building company declared insolvency.

SEOP, Spain's 13th biggest construction firm, said it had asked for creditor protection because its own clients -- many of whom are property developers -- had fallen behind on payments and bank financing was harder to come by.

Construction and property companies such as Colonial piled up huge debts over the last decade to make the most of a real estate boom fuelled by a cocktail of low eurozone interest rates and high domestic economic growth.

However, many property firms are now having to renegotiate loans they took out to buy land, build houses and buy rivals to diversify into other countries or areas of real estate.

A handful such as Valencia-based Llanera have gone bust as banks turn sour on a sector that is slowing much more sharply than expected, while others like Habitat and Martinsa Fadesa have had to battle to restructure their debt.

Sources in the property sector say the option of selling assets to pay debts is growing ever harder as banks cut back on mortgages and potential buyers negotiate prices down as they start to sniff desperation in the air.

Unlisted SEOP, which made turnover of $686 million, is the first major supplier to have been hit by the dwindling cash flow in the sector. It did not say how much its debts amount to.

CREDITOR POWER

While SEOP joined the ranks of companies filing for protection from creditors, other lenders are playing an ever more vital role in the future of Spain's property sector.

A partial bid for Colonial from Investment Corporation of Dubai (ICD) depends on the firm, its shareholders and ICD reaching agreements by midnight on Wednesday with three sets of banks which have loaned them more than 11 billion euros.

On Tuesday, Colonial's board essentially approved the terms of the deal and said it would work on the next steps it needs to take before ICD can buy its profitable rental business, leaving current shareholders with the riskier land and development unit.

ICD, an $82 billion sovereign wealth fund, wants to renegotiate the terms of a 7.2 billion euro syndicated loan led by Goldman Sachs, Eurohypo, Calyon and Royal Bank of Scotland.

Top shareholders Luis Portillo and the Nozaleda family, who own 46.5 per cent of the company, are in talks with banks that sources say lent them 2 billion euros backed by their Colonial shares, which have since lost about two thirds of their value.

A third set of lenders, including Spanish savings banks, loaned money to Colonial itself.

A source close to the deal said the syndicated loan banks, which had previously been against changing the terms of the debt as ICD had asked, were now more open to talks as long as the other sets of banks agreed on waivers and other measures.

If they force Colonial and shareholders to the wall and had to sell assets to cover their debts, it could depress the value of the buildings they own.

"I think the lenders want the company to survive, it's in nobody's interest to destabilise (it)," the source said. (Reuters)